“The implementation of Risk Management has moved one step forward to include the division level, and this enables the Adaro Group to be more focused on delivering value to the shareholders.”
The key risk management principles set forth in the Adaro Group’s risk management policy are as follows
understood before making key business decisions.
integrated into the management cycle of the company and embedded in planning processes, at both the operational and strategic level.
3. Being part of decision making
used in selecting appropriate decisions by taking into account the information on the risk exposure of every option.
managed to address uncertainty, put control mechanism, maximize opportunity and minimize negative impact.
5. Systematic, structured and timely
applied in a systematic, structured and timely manner across the Adaro Group to ensure efficient and reliable results.
6. Based on the best available information
managed using the best available relevant information with the awareness that some key information cannot be obtained.
7. Inclusive and transparent
engaging internal and external stakeholders in each step of risk management process and being transparent about all mitigation actions and the progress
8. Reassessed periodically
re-assessed periodically to identify whether there are new risks and risks that are no longer relevant.
communicated with the relevant stakeholders in order to obtain appropriate responses so that risks can be mitigated effectively.
Based on the explanation presented in this section, it can be concluded that has implemented effective risk management that conforms to the company’s principles of risk management.
The implementation of risk management, from defining objectives, assessing risks, formulating mitigation, until synchronizing plans, is performed by subsidiaries and coordinated by each Risk Champion.
As of December 2018, the Adaro Group had a total of 110 Risk Champions spread in all subsidiaries. Each subsidiary and division had at least two Risk Champions who had attended a two-day Enterprise Risk Management training. They are responsible for facilitating risk assessment process, aligning risk profiles with annual plans and budgets, and discussing the matters in the associated management meeting, to ensure the mitigation of key risks in their respective organization.
At the corporate level, the summary of consolidated risk profile for the Adaro Group is as follows:
- As of December 2018, there are nine types of risks which were categorized as high and key risks, in which two out of these were new risks categorized as key risks, i.e. macroeconomic risk and security threat risk, while investment risk level decreased from high to moderate.
- Compared to the previous year, the number of key risks remains the same, i.e. a total of nine risk types, while the other 20 types of risks which were at moderate and low levels were monitored and treated properly.
AE’s risk focuses in 2018:
1. Macroeconomic risk
The macroeconomic risk arises from the changes in broad economic conditions, as it may threaten the company’s ability to effectively conduct business, impact on the overall size and growth of the company’s markets, and reduce unit sales, pricing power and profitability.
The macroeconomic risk in 2018 increased from moderate to high level, and it is predicted to continue at high level in the year ahead. This increase was due to the volatility in the global capital and financial markets, which was exacerbated by the intensifying trade tensions between the US and China. Investor sentiments were also influenced by heightened geopolitical uncertainties and more volatile oil prices.
To anticipate such risk, AE secured healthy cash flows and the right capital structure to support more aggressive business investments in uncertain global conditions while maintaining prudent financial management and continuing to focus on operational excellence and efficiency.
2. Project risk
The project risk is associated with the failures to complete projects according to the budgeted costs, time schedule, and quality.
AE’s project risk in 2018 remained high as some of the Adaro Group’s key projects were still in in the completion phase. At the end of 2018, the IPP 2x1,000 MW steam power plant (PLTU) project had reached 66.1% while the IPP 2x100 MW steam power plant project had reached 98.9%. The commissioning work is underway to ensure the quality of the next 25 years.
The constructions of Coal Handling and Processing Plant (CHPP) and Lampunut hauling road were targeted to be completed to support Maruwai’s fist coal production.
The project to expand PT Adaro Indonesia’s mining area of “Tapian Timur” as of 31 st December 2018 with the total cumulative progress for the three main jobs (HDM Drilling and Site Preparation, IPM Plug and Abandon and Site Preparation, EPC Upgrading Production Facility and Discharge Production Facility) had achieved 43.12% while the cumulative costs incurred had achieved 36.44% of the total cost budget agreed.
To ensure that the projects progressed as planned, completed on time and according to the agreed budgets and quality, the Adaro Group selected reputable contractors, established a solid project management team and managed project risk.
Based on the progress achieved, AE is optimistic that the following projects will be completed on schedule:
- The commercial operations of the IPP 2x1000MW in Q420;
- The commercial operations of the IPP 2x100MW in H119; and
- The first coal production of Maruwai in Q319
3. Industrial risk
The industrial risk is the risk arising from the changes in industrial opportunities, which affects the company attractiveness or the long-term viability of the industry.
AE’s industrial risk in 2018 still remained at a high level and it is predicted that it will remain the same in the next year. The thermal coal business in 2018 was still the group’s cash cow, contributing 92% of the revenue. The coal price volatility risk will remain relatively high in the future.
To reduce this dependence on this industry, the Adaro Group has established eight business pillars for different industries to capture various opportunities along its value chain. AE will spur the growth of the non-thermal coal business to diversify its business and increase its contribution to the group significantly. The acquisition of Kestrel which produces high quality coking coal has further expanded the product portfolio and provided new opportunities for the Adaro Group.
4. Legal and regulatory compliance risk
The legal and regulatory compliance risk arises from lawsuits against the company, inadequate contract clauses, and regulatory incompliance that lead to liabilities for damages, fines, legal fees, damaged reputation or other negative impacts.
The companies within the Adaro Group are subject to a lot of ministerial, regional and other regulations and the incompliance with the regulations may lead to damage to reputation, sanctions, legal costs and other bad implications.
Each of AE’s subsidiaries must ensure that its activities are in full compliance with the prevailing laws and regulations. A compliance program has been implemented in a number of AE’s main subsidiaries since 2017 with the process as follows:
- Identify all regulatory requirements;
- Conduct self-assessment on the compliance with all applicable regulations with the facilitation from External Relations Division; and
- Discuss the outcomes of the assessment to ensure compliance.
In the future, the compliance program is expected to be implemented by all companies within the Adaro Group.
5. Security Threat
Individual or group of human actions threaten the security of the Company’s assets and employees such as security threats, civil disturbances, extortion and theft, ship piracy, labor strikes.
In managing security issues at work areas, AE has identified and assessed all risk factors of each work area. In its work area, which has been declared a national vital object by the government of the Republic of Indonesia, PT Adaro Indonesia (AI) has established the Guidelines for Implementing Security Confiuration (PPKP) as the basis for implementing internal security, appointed a third party to implement PPKP, and secured its operational area. This program is under a direct supervision of AI’s BOD.
6. People risk
People risk arises from the lack of knowledge, skills and experience among the key personnel and the inability to retain staff in a suffiient number, which threatens the achievement of business objectives.
In 2018, the people risk remained high and is expected to be the same in the next year. However, the company has taken the following steps to reduce the people risk in the following year:
- Implementing The Winning Team program in the business pillars of Adaro Mining, Adaro Services, Adaro Logistics, Adaro Power, Adaro Land and Adaro Water until department head level to ensure the availability of successors, especially for key positions;
- Consistently implementing the Adaro Mining Professional Program (AMPP) by recruiting the graduates of reputable universities to be developed into mining professionals who have the potentials to be the Adaro Group’s future leaders;
- Designing and implementing leadership and managerial training programs, i.e. Adaro Executive Program (AEP), commenced in 2018, and Adaro Middle Management Program (AMMP), commenced in the first quarter 2019. These training programs formulated based on the participants’ level in the organization are aimed at enhancing the leadership and managerial skills of the employees at each level.
The above three activities are implemented to reduce the people risk in the following year. More detailed explanation regarding the human resources programs above is presented on page 142 in the Our People section of this report.
7. Regulatory changes risk
The regulatory changes risk is associated with the regulatory changes that may affect the group’s ability to implement the company’s strategies, execute major transactions, comply with contracts, and other activities.
The level of regulation changes risk in 2018 remained high and it is predicted to stay the same in the next year. The regulations of the Adaro Group’s concern in 2018 are:
• MoEMR Ministerial Regulation No. 10/2018 concerning the Second Amendment to ESDM Ministerial Regulation No. 10/2017 regarding Power Purchase Agreement related to the provisions of force majeure
- MoEMR Ministerial Regulation No. 12/2017 concerning Utilization of Renewable Energy Sources for Provision of Electricity
- MoEMR Ministerial Regulation No. 53/2018 concerning the Amendment to MoEMR Ministerial Regulation No. 50/2017 concerning Utilization of Renewable Energy Sources for Provision of Electricity
- MoEMR Ministerial Regulation No. 11/2018 as lastly amended by MoEMR Regulation No. 51/2018 concerning the Second Amendment to MoEMR Regulation No. 11/2018 concerning the Procedures for Granting of the Area, Licensing, and Reporting in Mineral and Coal Mining Business
- MoEMR Ministerial Regulation No. 19/2018, concerning the Second Amendment to MoEMR Ministerial Regulation No. 7/2017 regarding the Procedure for Determining Metallic Mineral and Coal Reference Price regarding Coal Selling Price for Domestic Consumption
- MoEMR Ministerial Regulation No. 26/2018 and MoEMR Ministerial Regulation No. 50/2018 concerning the Implementation of Good Mining Practice and Supervision on Mineral and Coal Mining
- MoEMR Ministerial Decree No. 1827K/30/MEM/2018 concerning Implementation Guidelines for Good Mining Practice
- MoEMR Ministerial Decree No. 23K/30/MEM/2018 concerning the Determination of the Minimum Percentage of Coal Sales for Domestic Consumption in 2018
8. Health, Safety and Environment (HSE) risk
HSE risk arises from the failure to provide a safe working environment for the workers and the activities that are harmful to the environment, which exposes the company to the costs related to compensation liability, loss of business reputation or an increase in insurance costs.
In 2018, AE’s HSE risk remained high. AE recorded 118,412,706 total man hours Lost Time Injury Frequency Rate (LTIFR) of 0.13. AE applies the a-ZAM (Adaro Zero Accident Mindset) program, which must be carried out by every business unit entirely.
For managing the environmental risk, the companies within the Adaro Group carry out various measures, such as by fully complying with the AMDAL rules, treating hazardous and toxic waste, and preparing reclamation and mine closure plans.
More detailed explanation regarding the above programs is presented on page 216 in the HSE section of this report.
9. Business Interruption
The business interruption risk arises from major damages to key facilities and infrastructure such as bridges, hauling roads, coal handling terminals or the obstructions in the river channel that may cause long-term stoppages of operational activities.
The Adaro Group’s Crisis Management Team (CMT), which was formed in 2015, has identified three major events that may incur catastrophic impacts on the Adaro Group’s business activities. CMT has also prepared an optimum planning program to handle catastrophic events.
On 5th December 2018, the company performed a drill for crisis handling in the case of interruption at the mouth of the Barito river, which involved the mining, logistics and power business lines. The drill demonstrated the company’s ability to make the right decisions to restore the operations in fast and proper manner.
The Crisis Management Team in all business units of the Adaro Group has prepared Crisis Management Plan and a drill program for the next five years and will conduct the drill regularly every year to improve the readiness in dealing with any crisis situation. After the drill is conducted regularly, the business interruption risk level is expected to be lower.
The Adaro Group also has insurance coverage against business interruption caused by the damage to critical facilities.